Why the Australian Government Needs to Support the Car Industry - Case Study Example

International Business Issue Insert Name Tutor Date Australian car industry Introduction The Australian car industry is one of the strategic industries in the country. A strategic industry is a high growth industry that may generate high rates that lead to increased economic growth. It is an important industry considering how it contributes to the Gross Domestic Product. This is one of the reasons as to why the Australian government considers providing it with financial and other forms of assistance. However, continued support to the car industry through subsidies and reduction of tariffs may have various benefits to the economic growth of the country. It may also bear fruits to use tax payer’s money to support the car industry. This report therefore considers reasons as to why the Australian government should continue to fund the car manufacturing industry with the tax payers’ money. Why Australian government needs to support the car industry One of the major problems with the car industry in Australia is that it may be difficult to sustain its product development as well as manufacturing without intervention of the government. The car industry and its suppliers face a major challenge in ensuring successful competition in investment from the one set by traditional car manufacturers Australia. This is due to the changes that are occurring in the global automotive industry especially in the large investment flows towards enhancement of car manufacturing capability in the major upcoming automotive manufacturing countries. Another challenge lies in the need to improve the environmental performance of the Australian manufactured cars. These are some of the challenges that call for government support to enable the industry to withstand them. Potential Benefits of the green car program The green car program is a future plan that will see the country enjoy benefits such as attraction of new investments. With the changes in the global automotive market, it is important for the Australia’s automotive industry to catch up with these changes. Low cost competitors are on the rise and the rise in the prices of fuel has changed the environment in which the vehicles and component manufactures operate. The green car program will also make the car industry greener. This means changing it towards the changing consumer preferences. The preferences of the car industry consumers are changing towards fuel efficient cars and low emission vehicles. Other vehicle manufacturers in the world are also changing towards greener vehicle technologies However, to achieve all this, a lot of innovation is required. 5.3% of business spending in research and development is accounted for by the automotive industry in Australia. The government support for the green car plan will therefore increase the industry’s research and development and this will lead to increased innovative activities (Bracks, 2008, 42). The future of the car industry in Australia lies on its innovative capacity. With the rising living standard of the Australians, the car industry cannot rely on low cost production strategies. It has to produce cars of superior value for its both local and overseas customers otherwise it will lose its market position (Australian Government, 2008, 7-8) Why the plan needs funding from the tax payer’s money The success of the new car plan for a greener future requires a lot of commitment from the government of Australia as well as the people of Australia and the players in the car industry. Strengthening the car manufacturing industry will attract foreign direct investments (FDI). According to Trakman, (2010, 40), between 2005 and 2010, the level of FDI grew by 60% in Australia. Manufacturing sector was the second from mining sector contributing 62% of the total FDI growth. If the car industry in Australia goes down, the level of FDI is very likely to reduce. According to Straight Times Motoring, (2012, pp4), the Australian automotive industry had been facing strain due to the high Australian dollar and the competition that car industry sector had been facing from other countries. Due to this situation, GM Holden car manufacturers had threatened to closer its operations in Australia. However, after the announcement by the Prime Minister that the federal government will contribute $215 million under the New Car Plan, the GM Holden decided to inject $275 million to ensure that there is future of its operations in Australia. The closure of the GM Holden could have seen so many Australians lose jobs. However, the company has agreed to continue to operate in Australia until 2022. This will support the many jobs that could have been lost as well as secondary jobs for those who supply GM Holden with parts. Attracting more foreign direct investments also contributes towards the revenue that is collected from taxes and funding the car industry will not be a strain to the individual tax payers. Funding of the car industry by the government will also enable the country to maintain a stable economic situation by minimizing imports and maximizing exports as stated in the mercantilism theory of international trade. When the industry turns greener, it will meet the customer preferences of fuel saving and low carbon emitting cars which if not available locally, Australians will tend to import from other countries (Sen, 2010, 8). Role played by car industry to Australia’s status as a first world economy The car manufacturing industry plays a very big role in the Australia’s status as a first world economy. The industry contributes to this status by the role it plays in the manufacturing sector. The manufacturing sector is among the most important sectors for the economic growth of the developed countries being the engine of economic growth. A stable manufacturing industry ensures that the country imports less and experts more (Clark, Geer & Underhill, 1996, 10-12). According to the mercantilism theory of international trade, a country should encourage more exports while discouraging imports. The automotive industry (cars and parts industry) is the largest in the manufacturing sector in Australia. It contributes to 6 per cent of the total value added manufacturing and 1 % of the Gross Domestic Production (Federal Chamber of Automotive Industries, 2008, 9). Even though this sector does not contribute much to the GDP, it is important to maintaining the Australia’s status of the first world economy. This is mostly by the role the car industry plays in the provision of employment opportunities. For Australia to maintain that status, it has to deal with the problem of unemployment. It is estimated that the car industry, constituting the retail section, car servicing and repair produces annual turnover that exceeds $50 billion and offers employment for more than 400,000 people (Bracks, 2008, 32). The automotive industry is a major economic growth driver offering major economic benefits through education and training of its employees. This is as a result of the new technology that keeps coming in the car manufacturing industry. This enhances new engineering capabilities, new concepts in operation and management as well as contribution to global integration. The automotive industry also promotes domestic trade by being a major customer of suppliers of its significant parts. It is a customer to other Australian industries such as steel, rubber, paints, and electronics among others. Recently, the industry’s contribution to the Australia’s innovation system and its reputation as an exporter of advanced manufactured products has started to gain attention from some economic analysts Federal Chamber of Automotive Industries, 2008, 9). The future of the car industry in Australia The future of the car industry in Australia lies on the support it expects to receive form the government. If the industry is supported, the three local car manufactures, Holden, Toyota and Ford, will continue to operate in Australia and this will ensure that the industry continues to the future. This support from the government is also expected to enable the car industry survive the tough economic times and come out with a stable automotive industry. The government of Australia must work closely with the three companies so that they can attract more investors. The government should also take seriously its obligation to secure its people’s future jobs in the car industry. Some of the changes that are being proposed to enable the cat industry to survive in the future, includes introduction of global car models instead of producing those that are fully developed in Australia. The industry in conjunction with the government is working hard to prepare themselves to secure as many export opportunities as possible when the dollar comes down. The minister for manufacturing in Australia is also positive about the future of the car industry even after Toyota confirmed in January that is will have to cut 350 jobs from its operations due to the tough economic climate caused by the high dollar rate (Beissmann,2012, pp 1&3). Conclusion With the many benefits that the car manufacturing industry brings to Australia, it is justified to continue receiving support from the government through the tax payers’ money. This is considering the large numbers of employment it supports in the country. With the rising competition in the global market, there is need to support the car industry towards innovation so that it can catch up with the global market. Failure to support the industry will see the country lose a lot in terms of foreign direct investment as well as the revenue that the country raises from these investments. It will also not be a lot of strain from the tax payers since revenue from the FDI will also contribute towards the country’s pool of taxes. Recommendations for the future survival of the Australian car industry The future of the Australian automotive industry is very critical to the growth and the general wellbeing of the manufacturing industry in Australia and the entire Australian economy. Some of these recommendations are important to ensure that the industry survives into the future. It is important for the government to continue supporting the industry to maintain the role it plays in the economy of Australia. However, this support should be flexible so that it can address the changing environment of the global car manufacturing industry. For example, there needs to be a shift from the subsidies and reduced tariffs into searching for new market entries for the Australian cars as well as the manufacturers of automotive components. This will ensure that there are more export markets for the car industry. The government support should also focus on searching for strategies that will replace car importation (Australian Industry Group, 2002, 6-7). With the continued support, it is also important for the government to set limits on how far the tariffs can be reduced. This is to ensure that the support does not affect other sectors of the economy. For the automotive sector to maintain its competitive advantage there is need for it to invest in the improvement of its existing mechanisms of training and development. The global competition is on the rise due to new technologies in the automotive industry. Therefore to keep up with this, there is need for more investment on the knowledge and skills of the automotive workforce (Australian Industry Group, 2002, 10). Finally, flexibility is needed in the Australian car industry. This is to ensure that the sector has systems that are able to rapidly respond and adapt to the changing global car industry. This will also ensure that the industry is not affected by the changes such as in the Australian dollar and the competition from other countries. Bibliography Australian Industry Group, (2002), Australia’s automotive industries: A core foundation of the Australian economy. Automotive Industry Inquiry Productivity Commission, Melbourne. Australian Government, (2008). A New Car Plan for a Greener Future. Commonwealth of Australia. Beissmann,T. (2012), Car Industry central to Australia’s manufacturing future, Retrieved on 8th May 2012 from http://www.caradvice.com.au/156245/automotive-industry-central-to-australias-manufacturing-future-carr/ Bracks, S. (2008). Review of Australia’s Automotive Industry: Final report. Commonwealth of Australia. Clark, C., Geer, T., and Underhill, B. (1996), The changing of Australian Manufacturing. Commonwealth of Australia. Federal Chamber of Automotive Industries, (2008), Submission to the Review of Australia’s Automotive Industry, FCAI, Canberra. Sen, S. (2010). International Trade Theory and Policy: A review of the Literature. Levy Economics Institute of Bard College, New York. Straight Times Motoring, (2012). GM gets $363 million Australian Government handout. Retrieved on 8th April 2012 from http://www.straitstimes.com/Motoring/Story/STIStory_780914.html Trakman, L. (2010). Foreign Direct Investment: An Australian Perspective. University of New South Wales. Read More